Besanko & Braeutigam Microeconomics, 4

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File: ch08, Chapter 8: Cost Curves
Multiple Choice
! " long#run total cost curve
a$ al%a&s has a constant slope!
'$ is al%a&s up%ard sloping!
c$ never has a constant slope!
d$ is al%a&s do%n%ard sloping!
"ns: B
(! The cost o) producing a good in a single#product )irm is
a$ additional cost
'$ stand#alone cost
c$ varia'le cost
d$ average cost
"ns: B
*! "n indivisi'le input is
a$ an input that cannot 'e seen '& the naked e&e!
'$ an important input that the )irm cannot identi)&!
c$ an input that can onl& 'e o'tained in a certain minimum si+e!
d$ an input the )irm cannot stop using!
"ns: C
4! " )irm,s long#run average cost curve is comprised o)
a$ the minimum points o) each o) the )irm,s short#run average cost curves!
'$ the lo%er envelope o) the )irm,s short#run average cost curves!
c$ the minimum points o) each o) the )irm,s short#run marginal cost curves!
d$ the series o) points %here the short#run marginal cost curves intersect the short#
run average cost curves!
"ns: B
-! .hen average cost is /u#shaped0 1neither al%a&s rising or al%a&s )alling$, the marginal
cost curve %ill
a$ cross through 1'isect$ the average cost curve at its ma2imum!
'$ not intersect %ith the average cost curve at all!
c$ 'e a )i2ed distance a'ove the average cost curve!
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d$ cross through 1'isect$ the average cost curve at its minimum!
"ns: 7
8! The long#run total cost curve sho%s
a$ the various com'inations o) capital and la'or that %ill produce di))erent levels o)
output at the same cost!
'$ the various com'inations o) capital and la'or that %ill produce the same level o)
output!
c$ the minimum total cost to produce an& level o) output, holding input prices )i2ed,
and choosing all inputs to minimi+e cost!
d$ )or a )i2ed level o) capital, the minimum cost to produce a given level o) output!
9! " long#run total cost curve
a$ must 'e e:ual to +ero %hen the level o) output is +ero!
'$ ma& 'e greater than or e:ual to +ero %hen the level o) output is +ero!
c$ must 'e decreasing %hen the level o) output is +ero!
d$ %ill 'e e:ual to )i2ed cost, %hich is greater than +ero, %hen the level o) output is
+ero!
8! 5uppose )or a particular production )unction, the cost#minimi+ing level o) la'or is
( L Q =
and the cost#minimi+ing level o) capital is
- K Q =
! 6) - w = and ( r = , the
long#run total cost curve is
a$
9 TC Q =
'$ 9 TC =
c$
(0 TC Q =
d$ (0 TC =
"ns: C
;! 5uppose )or a particular production )unction, the cost#minimi+ing levels o) la'or and
capital are
0 0
Q r Q w
L K
w r
= =
6) - r = and (0 w = , %hat is the e:uation )or long#run total cost<
a$
(
-
Q
'$
(
0
Q
c$
(Q
d$
4Q
"ns: C
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0! .hich o) the )ollo%ing is not an accurate speci)ication o) a )irm,s long#run total cost
curve< FC stands )or )i2ed cost, =C stands )or varia'le cost, and "C stands )or average
cost, 'elo%!
a$ TC FC VC = + , %here FC > 0
'$ TC=FC + VC, %here FC ? 0
c$ TC wL rK = + , %here L and K are chosen to minimi+e cost, and w and r are input
prices!
d) TC = AC x Q
"ns: "
! 5uppose that a )irm,s production )unction can 'e speci)ied as
0 Q KL =
! .hich o) the
)ollo%ing accuratel& descri'es this )irm,s long run total cost )unction<
a$
0
Q
K
'$
0
Q
L
c$
0
(
rwQ
d$
rw
Q 0
(
(! "ssume that capital is measured along the vertical a2is, and la'or is measured along the
hori+ontal a2is! The )irm has an initial isocost line called

TC ! @o% suppose that the

price o) la'or dou'les, and the price o) capital )alls '& one#hal)! .hich statement
accuratel& descri'es the movement o) the isocost line )rom

TC to
(
TC <
a$ The slope o) the isocost line 'ecomes )latter!
'$ The slope o) the isocost line 'ecomes steeper!
c$ The slope o) the isocost line is unchanged!
d$ .e cannot determine %hether the slope 'ecomes )latter or steeper!
"ns: B
*! The long#run total cost curve tends to
a$ rotate up%ard %hen input prices )all!
'$ rotate up%ard %hen input prices rise!
c$ shi)t verticall& up%ard '& a )i2ed amount!
d$ shi)t verticall& do%n%ard '& a )i2ed amount!
"ns: B
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4! "ssume that capital is measured along the vertical a2is, and la'or is measured along the
hori+ontal a2is! The )irm has an initial isocost line called

TC ! @o% suppose that the

price o) la'or tre'les and the price o) capital also tre'les! .hich statement accuratel&
descri'es the movement o) the isocost line )rom

TC to
(
TC <
a$ The slope o) the isocost line 'ecomes )latter!
'$ The slope o) the isocost line 'ecomes steeper!
c$ The slope o) the isocost line is unchanged!
d$ .e cannot determine %hether the slope 'ecomes )latter or steeper!
-! .hen the price o) all inputs increase '& the same percentage,
a$ the )irm,s total cost curve %ill rotate up%ard '& a higher percentage i) the )irm,s
production technolog& e2hi'its decreasing returns to scale!
'$ the )irm,s total cost curve %ill rotate up%ard '& the same percentage!
c$ the )irm,s total cost curve %ill rotate up%ard '& a higher percentage i) the )irm,s
production technolog& e2hi'its increasing returns to scale!
d$ the )irm,s total cost curve %ill remain unchanged since the cost#minimi+ing
com'ination o) inputs is unchanged!
"ns: B
8! The output elasticit& o) total cost is de)ined as
a$ the percentage change in output per one percent change in total cost!
'$ the percentage change in total cost per one percent change in output!
c$ output divided '& total cost!
d$ total cost divided '& output!
9! "n increase in the price o) one input
a$ %ill al%a&s rotate the long#run total cost curve up%ard!
'$ ma& rotate the long#run total cost curve up%ard or ma& leave the long#run total
cost unchanged!
c$ could actuall& rotate the long#run total cost do%n%ard!
d$ %ill have no e))ect on the long#run total cost curve as long as long as the )irm is
using positive amounts o) 'oth inputs!
"ns: B
8! Cost driver is
a$ a mathematical relationship that sho%s ho% total costs var& %ith the )actors that
in)luence total costs
'$ a )actor that in)luences or /drives0 total or average costs
c$ a )actor that in)luences :ualit& o) output and prices o) inputs
d$ a cost level!
"ns: B
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;! .hen the prices o) all inputs increase '& a proportionate amount,
a$ the )irm,s total cost curve %ill remain unchanged since the cost#minimi+ing
com'ination o) inputs is unchanged!
'$ the )irm,s total cost curve ma& rotate up%ard or ma& leave the long#run total cost
curve unchanged!
c$ %ill al%a&s rotate the long#run total cost curve up%ard!
d$ could actuall& rotate the long#run total cost do%n%ard i) the )irm chooses to
produce a lo%er level o) output!
"ns: C
(0! 6denti)& the truth)ulness o) the )ollo%ing statements!
6! Marginal cost can 'e measured as the slope o) the total cost curve!
66! "verage total cost can 'e measured as the slope o) the ra& )rom the origin to the
total cost curve!
a$ Both 6 and 66 are true!
'$ Both 6 and 66 are )alse!
c$ 6 is trueA 66 is )alse!
d$ 6 is )alseA 66 is true!
"ns: "
(! The relationship 'et%een the long#run total cost curve and the marginal and average cost
curves is 'est descri'ed '& %hich o) the )ollo%ing statements<
a$ The slope o) the total cost curve )rom the origin to a point on the total cost curve
is ho% &ou derive the marginal cost curve %hile the average cost is given '&
TCBC!
'$ Marginal cost is MCBC %hile average cost is TCBC!
c$ Marginal cost is derived '& dividing total cost '& a constant as is average cost!
d$ The slope o) the total cost curve at each point is ho% &ou derive the marginal cost
curve %hile the slope )rom the origin to a point on the total cost curve is ho% &ou
derive the average cost curve!
"ns: 7
((! 5uppose that a )irm,s long#run total cost curve can 'e e2pressed as
(
0 (0 TC Q Q = + !
This )irm,s long#run average total cost curve can 'e e2pressed as
a$
(0 (0 AC Q = +
!
'$
0 (0 AC Q = +
!
c$
0 (0 AC Q = +
!
d$
(
0 AC Q = !
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(*! For a )irm, let total cost 'e TC(Q) = 160+10Q
2
and marginal cost 'e MC(Q) = 20Q.
.hat is the minimum e))icient scale )or this )irm<
a$ 0
'$ (
c$ 4
d$ indeterminate
(4! 5uppose that a )irm,s total costs o) production are 0 at an output o) +ero, 0 at an output
o) , (0 at an output o) ( units, *0 at an output o) three units, *- at an output o) )our units
and *9 at an output o) )ive units! "t %hich num'er o) units are marginal and average
costs e:ual<
a$ The )irst unit!
'$ The )i)th unit!
c$ The third unit!
d$ "t the )irst, second and third units!
(-! For a )irm, let total cost 'e TC(Q) = 10Q
2
and marginal cost 'e MC(Q) = 20Q. .hich o)
the )ollo%ing is an e2pression )or the output elasticit& o) total cost<
a$ TC,Q = 10Q.
'$ TC,Q = 2Q!
c$ TC,Q = 2!
d$ TC,Q = 20Q!
(8! 5uppose that a )irm,s total costs o) production are 0 at an output o) +ero, 0 at an output
o) , (0 at an output o) ( units, *0 at an output o) three units, *- at an output o) )our units
and *9 at an output o) )ive units! "t %hich num'er o) units is average cost minimi+ed<
a$ The )irst unit!
'$ The )i)th unit!
c$ The third unit!
d$ "t the )irst, second and third units!
"ns: B
(9! 5uppose that a )irm,s long#run total cost curve can 'e e2pressed as
1 $ 00 TC Q Q =
! This
)irm,s long#run marginal cost curve can 'e e2pressed as
a$ 00 MC = !
'$
00 MC Q =
!
c$
(
00 MC Q = !
d$ 0 MC = !
"ns: "
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(8! 6denti)& the truth)ulness o) the )ollo%ing statements!
6! .hen marginal cost is rising, average total cost is rising!
66! .hen marginal cost is 'elo% average total cost, average total cost is )alling!
a$ Both 6 and 66 are true!
'$ Both 6 and 66 are )alse!
c$ 6 is trueA 66 is )alse!
d$ 6 is )alseA 66 is true!
"ns: 7
(;! 6) average cost is constant )or all levels o) output,
a$ the marginal cost curve %ill intersect the average cost at a single point, the
minimum o) average cost!
'$ marginal cost %ill 'e e:ual to average cost )or all levels o) output!
c$ marginal cost %ill 'e a'ove average cost %hen average cost is increasing and
marginal cost %ill 'e 'elo% average cost %hen average cost is decreasing!
d$ marginal cost %ill have a region o) diminishing marginal cost!
"ns: B
*0! Marginal cost
a$ is e:ual to average cost at the minimum point o) the marginal cost curve!
'$ is e:ual to average cost at the ma2imum point o) the average cost curve!
c$ is decreasing %henever average cost is decreasing!
d$ is e:ual to average cost at the minimum point o) the average cost curve!
*! .hen the production )unction is given '& C > D, %hich o) the )ollo%ing statements is
true<
a$ TC > %C
(
, D > C
(
and "C > %
'$ TC > % # C, D > C and "C > %
c$ TC > %C, D > C and "C > %
d$ TC > %C, D > C and "C > D
*(! 5uppose a )irm,s total cost curve is given '& the e:uation
(
( 00 TC Q Q = + + ! The
)irm,s marginal cost is
( ( MC Q = +
! "t %hat level o)
Q
does the )irm,s average cost
curve reach a minimum<
a$ 00
'$ (
c$ 0
d$ (0
"ns: C
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**! 5uppose a )irm produces -0,000 units o) output, and determines that its marginal cost is
E0!9( and its average total cost is E0!9(! At this !antit" o# o!t$!t, %hat is the slope o)
this )irm,s long run average total cost curve<
a$ Fp%ard#sloping!
'$ 7o%n%ard#sloping!
c$ Gori+ontal!
d$ =ertical!
"ns: C
*4! Marginal cost is
a$ the cost per unit o) output!
'$ the increase in total cost )rom producing an additional unit o) output!
c$ the same thing as total varia'le cost!
d$ is onl& relevant in the long#run!
*-! " )irm notices that %hen it increases output 'e&ond an initial level

Q , average total cost

decreases! For this )irm, the region o) output 'e&ond

Q is characteri+ed '&
a$ economies o) scale!
'$ diseconomies o) scale!
c$ constant economies o) scale!
d$ the minimum e))icient scale!
"ns: "
*8! .hich o) the )ollo%ing )actors %a" e2plain diseconomies o) scale<
a$ 6ncreasing returns to scale o) inputs!
'$ 5peciali+ation o) la'or!
c$ 6ndivisi'le inputs!
d$ Managerial diseconomies!
"ns: 7
*9! The output elasticit& o) total cost is e:ual to
a$ the slope o) the isocost line!
'$ the ratio o) marginal cost to average cost!
c$ the ratio o) average cost to marginal cost!
d$ the ratio o) average cost to total cost!
"ns: B
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*8! .hen the output elasticit& o) total cost is less than one,
a$ Marginal cost is less than average cost and average cost decreases as C increases!
'$ Marginal cost is less than average cost and average cost increases as C increases!
c$ Marginal cost is greater than average cost and average cost decreases as C
increases!
d$ Marginal cost is greater than average cost and average cost increases as C
increases!
"ns: "
*;! Minimum e))icient scale is
a$ the lo%est level o) e))icienc& the )irm can achieve!
'$ the highest level o) output the )irm can achieve!
c$ the lo%est level o) long#run average cost!
d$ the smallest :uantit& at %hich the long#run average cost achieves a minimum!
"ns: 7
40! Hconomies o) scale e2ist %hen )irms have
a$ increasing returns to scale!
'$ constant returns to scale!
c$ decreasing returns to scale!
d$ constant marginal cost!
4! 5uppose a )irm,s production )unction can 'e speci)ied as Q = 10KL! This )irm,s cost
)unction e2hi'its
a$ economies o) scale
'$ diseconomies o) scale
c$ neither diseconomies nor economies o) scale!
d$ economies o) scale )or output levels less than some level, Q1= 1&', and
diseconomies o) scale therea)ter!
4(! 5uppose a )irm,s total cost curve can 'e %ritten TC(Q) = Q ( .)Q
2
+ Q
*
, %ith marginal
cost MC(Q) = 1 + Q + *Q
2
. This cost )unction e2hi'its:
a$ economies o) scale
'$ diseconomies o) scale
c$ neither diseconomies nor economies o) scale!
d$ economies o) scale )or output levels less than some level, Q1 = 1&', and
diseconomies o) scale therea)ter!
"ns: 7
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4*! 5uppose the output elasticit& o) total cost is !-! This implies the average cost curve
e2hi'its
a$ increasing returns to scale!
'$ economies o) scale!
c$ neither economies nor diseconomies o) scale!
d$ diseconomies o) scale!
"ns: 7
44! 6) the output elasticit& o) total cost is less than one, then the long#run average cost curve
e2periences
a$ economies o) scale!
'$ diseconomies o) scale!
c$ decreasing returns to scale!
d$ the minimum e))icient scale!
"ns: "
4-! 7iseconomies o) scale e2ist %hen
a$ the )irm,s total cost )alls as the level o) output increases!
'$ the )irm,s total cost increases as the level o) output increases!
c$ the )irm,s average cost decreases as the level o) output decreases!
d$ the )irm,s average cost decreases as the level o) output increases!
"ns: C
48! .hich o) the )ollo%ing )actors wo!,d not e2plain economies o) scale<
a$ 6ncreasing returns to scale o) inputs!
'$ 5peciali+ation o) la'or!
c$ 6ndivisi'le inputs!
d$ Managerial diseconomies
"ns: 7
49! 5uppose a )irm,s production technolog& e2hi'its constant returns to scale! The )irm,s
long#run a-.ra/. cost curve %ill
a$ 'e F#shaped
'$ e2hi'it economies o) scale!
c$ e2hi'it diseconomies o) scale!
d$ 'e a hori+ontal straight line!
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48! The short#run total cost curve is the sum o) t%o components
a$ 5hort#run and long#run
'$ Total varia'le cost curve and total )i2ed cost curve
c$ "verage cost curve and marginal cost curve
d$ Hconomies o) scale and economies o) scope
4;! The short#run total cost curve
a$ sho%s the minimi+ed total cost o) producing a given :uantit& o) output!
'$ sho%s the outputs that correspond to minimi+ed total cost %hen at least one input
is )i2ed!
c$ sho%s the minimi+ed total cost o) producing a given :uantit& o) output %hen at
least one input is )i2ed!
d$ sho%s the minimi+ed total cost o) producing a given :uantit& o) output %hen all
inputs are )i2ed!
-0! 5uppose
Q KL =
in the short#run! The )irm,s short#run )i2ed cost curve is
a$

=
K
Q
0FC
(
'$

+ = K r
K
wQ
0FC
(
c$
=
K
wQ
0FC
(
d$

= K r 0FC
-! 5uppose
Q KL =
in the short#run! The )irm,s short#run total cost curve is
a$
(
Q
0TC
K
=
'$
wK
0TC rK
Q
= +
c$
(
0TC Q K = +
d$
(
wQ
0TC rK
K
= +
"ns: 7
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-(! 5uppose a )irm,s short run total cost curve can 'e e2pressed as 0
1 $ -0 0 TC Q Q = +
! This
)irm,s short#run average total cost curve can 'e e2pressed as
a$
0
-0
Q
+
!
'$
-0Q
!
c$ -0!
d$ 0!
-*! 5uppose
Q KL =
in the short#run! The )irm,s short#run varia'le cost curve is
a$

=
K
Q
0FC
(
'$

+ = K r
K
wQ
0FC
(
c$
=
K
wQ
0FC
(
d$

= K r 0FC
"ns: C
-4! 5uppose a )irm,s short run total cost curve can 'e e2pressed as 0
1 $ -0 0 TC Q Q = +
! This
)irm,s short#run marginal cost can 'e e2pressed as
a$
0
-0
Q
+
!
'$
-0Q
!
c$ -0!
d$ 0!
--! 5uppose 0TC(Q) = 2Q + 20! 5hort run marginal cost is
a$ indeterminate, since %e don,t kno% the level o)
Q
!
'$ ((
c$ (0
d$ (
"ns: 7
-8! Hconomies o) IIIIII occur %hen a single )irm can produce t%o products together )or a
lo%er total cost than t%o )irms could produce those same products separatel&, one at each
)irm!
a$ scale!
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'$ scope!
c$ e))icienc&!
d$ output!
-9! Hconomies o) scope
a$ are related to the average cost o) producing a good %hen &ou dou'le the scale o)
output!
'$ are higher the more speciali+ed a )irm is in production!
c$ means the rotation o) the long#run total cost curve in a do%n%ard direction!
d$ are a production characteristic in %hich the total cost o) producing given
:uantities o) t%o goods in the same )irm is less than the total cost o) producing
those :uantities in t%o single#product )irm!
"ns: 7
-8! The e2perience curve 1also called the learning curve$ sho%s the relationship 'et%een
a$ average total cost and output!
'$ average varia'le cost and returns to scale!
c$ output and marginal cost!
d$ average varia'le cost and cumulative production volume!
-;! The percentage change in average varia'le cost )or ever& percent increase in
cumulative volume is re)erred to as
a$ e2perience elasticit&
'$ e2perience curve
c$ e2perience output
d$ e2perience slope
"ns: "
80! Hconomies o) e2perience are e2hi'ited %hen
a$ it takes a pro)essor a smaller :uantit& o) time to prepare a lesson )or a ne% class
than )or the )irst class he taught!
'$ an older pro)essor is more intelligent than a &ounger pro)essor!
c$ a pro)essor goes into 'usiness as a consultant!
d$ a pro)essor reaches age 8- and 'egins to get a senior citi+en discount!
"ns: "
8! Det the average varia'le cost o) production 'e E(0 %hen 0 units are produced in the )irst
&ear! 6n the second &ear, a)ter the second 0 units have 'een produced, the average
varia'le cost o) production is E(! The slope o) the e2perience curve )or this )irm is:
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a$ 8-J
'$ 80J
c$ 9-J
d$ (J
"ns: B
8(! 6denti)& the truth)ulness o) the )ollo%ing statements!
6! Hconomies o) H2perience impl& that Hconomies o) 5cale must e2ist!
66! Hconomies o) 5cale impl& that Hconomies o) H2perience must e2ist!
a$ Both 6 and 66 are true!
'$ Both 6 and 66 are )alse!
c$ 6 is trueA 66 is )alse!
d$ 6 is )alseA 66 is true!
"ns: B
8*! " production process that involves t%o inputs, capital and la'or, the constant elasticit&
long#run total cost )unction de)ined in linear relationship using logarithms is
a$ log TC > log a K 1 log Q K 2 log w K d log r
'$ log T > log t K 2 log Q K a log w K ' log r
c$ T > log t K 2 log Q K a log w K ' log r
d$ T > t K 2Q K aw K 'r
"ns: "
84! Det a )irm,s long run total cost 'e descri'ed '& the constant elasticit& total cost )unction!
The coe))icient o) the log o) output in this )unction is interpreted as the
a$ average cost!
'$ marginal cost!
c$ output elasticit& o) total cost!
d$ cost driver!
"ns: C
8-! Det a )irm,s long run total cost 'e descri'ed '& the constant elasticit& total cost )unction!
The coe))icients o) the log o) the %age and the log o) capital in this )unction should
a$ add up to one!
'$ 'e negative!
c$ 'e o) opposite sign!
d$ o) indeterminate sign!
"ns: "
88! The )ollo%ing is not a propert& o) the translog cost )unction:
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a$ The constant elasticit& cost )unction is a special case o) it!
'$ The average cost ma& 'e F#shaped!
c$ 6t is a good appro2imation )or almost an& production )unction!
d$ 6t onl& applies to long run total costs!
"ns: 7
89! The e:uation o) translog cost )unction is
a$ !
'$
c$
d$ T > t K 2Q K aw K 'r
"ns: "
88! " constant elasticit& cost )unction
a$ takes a )orm such as TC = a Q
1
w
2
r
d
and is use)ul in empirical %ork 'ecause it
can 'e converted into a linear )orm using logarithms!
'$ takes a )orm such as TC wL rK = + , %here L and K are chosen to minimi+e cost,
and w and r are input prices!
c$ takes a )orm such as TC = a Q
2
+ KL.
d$ is given '& TC = AC x Q.
"ns: "
Cop&right 3 (0 4ohn .ile& & 5ons, 6nc! 8#-